The Tax framework The Labuan Tax framework

2 The Labuan Tax framework

The Labuan Tax framework

Labuan is an island in the off the coast of the state of in East . It is also known as an offshore financial centre, offering international financial and business services.

Although Labuan is a within Malaysia, there are preferential tax treatments for companies conducting Labuan business activities, such as low fixed tax rate of 3%, withholding tax exemption on payments to non-residents, tax exemption on fees paid to non- citizen directors and so on.

In addition, Labuan companies are not restricted by regulations relating to foreign exchange control and foreign ownership. For Chinese companies that have their sights set on overseas expansion, Labuan may play a meaningful role in their expansion strategies. We are pleased to provide you further information about the Labuan Tax framework.

Overview of the Labuan Tax framework

1. Where is Labuan? Labuan is 18km off the coast of Sabah, and 171 kilometers from ( of Sabah). It is a federal territory of Malaysia with an estimated population of 100,000. 2. What is a Labuan Labuan entities are entities listed in the Schedule (Section 2B) of the Labuan Business Activity Tax Act 1990 entity? (see list below) that also meet the specified substantive requirements. The substance requirements include minimum number of employees and minimum amount of annual operating expenditure in Labuan for carrying on Labuan business activity. Labuan entity Defined/ Established/ Registered under Act Labuan company Labuan Foundations Act 2010 Labuan foundation Labuan Islamic Financial Services and Securities Act 2010 Labuan Islamic partnership Labuan Islamic Financial Services and Securities Act 2010 Labuan limited partnership Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 Labuan limited liability Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 partnership Labuan Islamic trust Labuan Islamic Financial Services and Securities Act 2010 Labuan trust Labuan Trusts Act 1996 Malaysian Islamic bank Labuan Islamic Financial Services and Securities Act 2010 licensee Malaysian bank licensee Labuan Financial Services and Securities Act 2010 Labuan financial institutions Labuan Financial Services Authority Act 1996 3. What defines a Labuan business activity means a Labuan trading or a Labuan non-trading activity carried on in, from or Labuan business through Labuan, excluding any activity which is an offence under any written law. activity? Labuan entities as listed in the Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 (“the Regulations”) are required to comply with the minimum requirements in respect of number of full time employees in Labuan and amount of operating expenditure in Labuan.

Entities which are not listed in the Regulations or do not meet the minimum requirements as specified in the Regulations will not be regarded carrying on Labuan business activity and will be subject to tax under the Malaysian Income Tax Act 1967.

The authorities may revise the Regulations from time to time.

3 The Labuan Tax framework

4. Labuan trading Labuan trading activities Labuan non-trading activities and non-trading •• Banking An activity relating to the holding of investments in securities, stock, loans, activities •• Insurance deposits or any other properties situated in Labuan by a Labuan entity on its •• Trading own behalf. •• Management •• Licensing •• Shipping operations

Or any other activity which is not a Labuan non-trading activity. Taxation System in Labuan 1. What tax regimes Description Tax treatment apply? Labuan non-trading Activity Not subject to tax Labuan trading activities 3% of net profits per audited accounts

Carrying out both Labuan 3% of net profits per audited accounts trading and non-trading activities - Deemed to be a Labuan trading activity Non-Labuan business Tax under Malaysian Income Tax Act 1967 – 24% activity Royalty and other income Tax under Malaysian Income Tax Act 1967 – 24% derived from an intellectual property right if receivable as consideration for the commercial exploitation of that right Any person rendering 65% of the statutory income derived from such provision of qualifying qualifying professional professional services will be tax exempted. services (legal, accounting, financial or secretarial services) in Labuan to a Labuan entity 2. Does Labuan Generally, Labuan companies can access most of Malaysia’s network of more than 70 Double Tax have any tax Agreements (DTAs). However, Labuan has been specifically excluded from DTAs with Australia, Chile, treaties? Germany, India, , Japan, Luxembourg, Netherlands, South Africa, Spain, Sweden, the Republic of Seychelles and the . 3. Resident who The following payments made by a resident to a Labuan company are not allowed for deduction under the transacts with Malaysian Income Tax Act 1967: Labuan company 1. Interest payment – 33% not allowable 2. Lease rental – 33% not allowable 3. Other payment – 97% not allowable

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4. Individuals Individual residents in Labuan, with income accruing in or derived from Malaysia are subject to tax. Foreign sourced income received in Malaysia by resident individuals are tax-exempt. The rate of tax ranges from 0% to 28% for resident individuals and a flat rate of 28% for non-resident individuals.

The following tax exemptions are available to certain individuals up to YA 2020: Taxpayers Tax exemptions Any person rendering 65% of the statutory income derived from such provision of qualifying qualifying professional professional services. services (legal, accounting, financial or secretarial services) in Labuan to a Labuan entity Non-citizen individuals 50% of gross income from such employment. employed in a managerial capacity with a Labuan entity in Labuan, co-located office or marketing office of a Labuan entity in other parts of Malaysia. Non-citizen individuals Directors’ fee received. acting in their capacity as a director of a Labuan entity. Citizen of Malaysia who 50% of gross housing allowance and gross Labuan Territory allowance received housing allowance received. and Labuan Territory allowance from exercising an employment in Labuan with a Labuan entity. 5. Capital Gains For Labuan entities carrying on Labuan trading activity and both Labuan trading and non-trading activities, the gains would be reflected as part of the net profits and subject to 3% tax. 6. Withholding Royalties, interest, technical or management fees and other gains or profits under Section 4(f) of the Income Taxes Tax Act 1967 paid by a Labuan company to a non-resident person or another Labuan company subject to tax under LBATA are exempted from income tax and thus not subject to withholding tax.

5 The Labuan Tax framework

7. Indirect Taxes Service Tax Sales Tax Generally, service tax is Generally, sales tax is charged at the rate of 5%, 10% or a specific prescribed charged at the rate of 6% on rate for goods manufactured in Malaysia or imported into Malaysia. Sales Tax prescribed taxable services is a non-creditable tax and any sales tax paid is a cost to the business. provided in Malaysia and any taxable imported services. However, Labuan has been given a concessional sales tax treatment as a The prescribed taxable designated area. Currently the islands of and Tioman are also services are listed in the designated areas, with Pangkor proposed to be added. Service Tax Regulations 2018. The service tax is Goods (other than ) manufactured in the designated area are a non-creditable tax and not subject to sales tax. Further, no sales tax shall be levied on goods any tax paid is a cost to the imported into the designated area (from overseas or from other places in recipient of the service. Malaysia), transported between designated areas, and transported from the designated area to the Special Areas (which represent specifically designated Some examples of services customs zones which are afforded concessional treatment for sales tax and that are within the scope customs duties). of service tax include Group and Corporate insurance policies, individual insurance policies excluding life and medical, broking and underwriting services, consultancy and accountancy services, management services and information technology services.

However, Labuan has been given a concessional service tax treatment as a designated area. Currently the islands of Langkawi and Tioman are also designated areas, with Pangkor proposed to be added.

Services provided within or between designated areas will not be subject to service tax. However, services from the designated area to other places in Malaysia (and vice versa) or services imported into the designed area will be subject to service tax. 8. Stamp Duty The following instruments are exempted from stamp duty: •• all instruments which are executed by a Labuan entity in connection with a Labuan business; •• all Memorandum and Articles of Association, statute, charter, rules, by-laws, partnership agreement or other instrument, under or by which a Labuan entity is established and the scope of that entity’s function, business, powers and duties are set out, whether contained in one or more documents; and •• all instruments of transfer of shares in a Labuan entity.

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Contact us

Gooi Yong Wei Deputy Leader, Southeast Asia Financial Services Industry Tax +603 7610 8981 [email protected]

Senthuran Elalingam Asia Pacific Financial Services Industry Indirect Tax Leader +603 7610 8879 [email protected]

Mark Chan Director +603 7610 8866 [email protected]

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